5/25/2003

fiscal dishonesty

We have all heard the refrain. "I'm socially liberal and economically conservative." And then the inevitable punchline, "That's why I vote for the GOP."

For those folks who say that - including the punchline - this is kind of like a statement of religios zeal. of course the GOP is better with my money. It's the political equivalent to the Muslim shahada (oath of belief): "There is no god but Tax Cuts, and the GOP is his Prophet"

For those who profess the GOP shahada, trying to point out the inherent contradictions is a fool's errand. "We want smaller government" they say, while the federal discretionary (non-military) spending grows faster under GOP congresses and presidents. "We want tax relief for working families" they say, while the tax cuts flow to the top 1% (and notice how these supposed populists never mention cutting payroll taxes?)."We think social services are a huge waste of taxpayer money" they say, while the uninsured consume the county budgets and the states deal with massive unfunded mandates.

It used to be that conservatives thought deficits were a bad thing. Remember the Contract with America and the Federal Budget Amendment?

But we need to be clear about what direction we are heading. And RonK DailyKos has a fantastic series on just why the looming deficit matters. First, he puts the estimated debt ($10 TRILLION dollars) in some perspective. In part 2, he addresses all the "It's no big deal" arguments that are now being pushed out by so called fiscal conservatives. To his credit, he does acknowledge the kernels of truth each such claim, but goes on to demonstrate why that is always only half the picture:

First, it's no big deal because we never have to pay it back. True, in a way.

An individual ages and dies. A business eventually fails, no matter how magnificently it succeeds. If one owes you money, you want money back in finite time. A nation, however, has perpetual assets and income streams. Creditors come and go, their IOU's paid with proceeds of new IOUs sold on the open market.

But ... but ... BUT ... borrowing capacity is limited, because lending capacity is limited ... because interest expense mounts up ... and because lenders will start imposing incrementally harsher terms long before the borrow-from-Peter-to-pay-Paul pyramid crashes. Nobody wants to be last in line when they run out of Free Lunch.

It's no big deal because we can handle the payments. True, for now. In a $10T economy, interest on a $10T debt is a bearable 4% tax burden on aggregate GDP. (The percentage rate burden on taxable income higher, since TI is a subset of GDP.)

But ... but ... BUT ... the current sweet spot is a fool's paradise. The global economy may recover -- in which case interest rates will rise markedly. Or the global economy may stay depressed -- in which case our revenue projections are unrealistic. (Tax receipts will fall below forecast ... debt will accumulate faster ... and the expected lending pools of surplus private assets may evaporate.)

It's no big deal because the economy will grow and leave the debt behind. That's the normal scheme of things. Economies grow ... it's their nature. It makes sense to live in houses and drive cars we haven't paid off yet. It makes sense to finance public works that deliver decades of useful life. Run up debt in a $10T economy, pay it back out of petty cash in a $100T economy.

But ... but ... BUT ... the debt today is growing faster than the economy, and it is structured to keep doing so. Economies don't grow that fast ... it's not their nature. The tax-cutters aren't done yet, they're not making the kind of public investments that facilitate economic growth, and the Baby Boomers are inching closer to retirement. [Remember, just three years ago we had plans to pay off the entire national debt to position ourselves for this predictable strain.] At some point a combination of lender reluctance and taxpayer resistance will stop the game.

[Did somebody say it's no big deal because the cuts will pay for themselves? Forget it. No if's, and's or but's. No legitimate model -- no matter how dynamic -- produces any such result. No reputable economist -- left, right, center or future -- states any such case. You probably thought they said it in Reagan's time, but -- as Laffer himself points out -- none ever did. It was all clever juxtaposition and parsing. You won't hear it now, except from political operatives who can't be held accountable. The dissonance is probably why they just moved the Council of Economic Advisors out of the White House.]

It's no big deal because we owe it to ourselves. True up to a point. For every dollar in national debt there's a corresponding dollar in US bonds or other IOUs. Somebody owns that IOU, and they get a dollar back -- with interest -- when it's paid off. But ... but ... BUT ...

(1) The somebody who holds the IOUs matching your $100K (average household) share of the fiscal fiasco is probably not you. You might have a few hundred dollars in savings bonds, or hold US debt indirectly via a money-market account. "Somebody" owns millions ... probably somebody who got rich(er) by virtue of unrealistically low, debt-subsidized taxe rates. Even if you own nada, you get taxed (for the rest of your life) to redeem all of somebody's IOUs.

Paying the piper means a massive tax-mediated net transfer of wealth from the many to the few.

Paying the piper means taxpayers do all the giving ... but less than half the getting.

(3) Somebody isn't necessarily one of us. Foreigners save, lending us their surplus ... so American consumers can live beyond their means, corporations can leverage their earnings, and politicians can spend without taxing. Our economy -- bathed in a gentle rain of "free" money -- is less prosperous than it looks, to the tune of several hundred billion dollars a year. After a while it adds up.

Paying the piper means American taxpayers give, and foreign creditors get ... even the (shudder) French. Think of it as a Louisiana Purchase in reverse.